Strategy Sweden: SBAB To Offer New 5 Year Covered Bond

Starting on Monday 18 November (depending on market conditions) SBAB will start introducing a new 5Y covered bond (SE0005468022) maturing on 19 December 2018. The coupon rate is set at 4%. The initial target volume is set to SEK 3billion, a relatively modest size. Over time, we would expect the loan to grow significantly as it will become the new 5Y benchmark.

The latest covered bond introductions in recent weeks have gone smoothly, with strong demand and a repricing of the long end of mortgage bond curves. We think domestic covered bonds have benefited from the favourable relative issuance costs in EUR, which have dampened supply expectations in SEK. These factors are still at play.

Given the small initial volume and strong demand for similar bonds in recent weeks, we think the introduction should go relatively smoothly. Taking a longer perspective, we think covered bonds as an asset class could benefit from the ‘low for longer’ theme as it would probably mean a renewed hunt for yield.

Pricing
SCBC139 matches the newly introduced SHYP1581 maturity-wise. On shorter maturities, SCBC trades marginally below Stadshypotek bonds. We think that SCBC139 should trade close to SHYP1581 in ZC terms. What is noteworthy, however, is that SHYP1581 looks slightly dear on the curve, mostly due to technical reasons (upcoming futures roll).

We assume that all curves are correctly priced and that the new loan will in due time reach benchmark volumes. We use market prices as of 15 November, 14.00 CET. We think a fair value for SCBC139 is 21 to 23 above SCBC134. The graph below shows how the mortgage bonds compare with the government curve. The level of 22bp above SCBC139 implies a zero coupon spread over the government curve of around 74bp.

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